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S-Cool Revision Summary

S-Cool Revision Summary

Adaptive expectations

Different economists argue about the length of the short run (in the context of the short run Phillips curve) because they argue about the length of time it takes for workers to adapt their expectations of the future rate of inflation. Those who believe in adaptive expectations think that workers adapt their expectations of the future inflation rate to changes in the actual inflation rate after a reasonable length of time, unlike believers of rational expectations who think the transformation is almost immediate.

Aggregate demand

This is the aggregate of all the demand in the economy. It includes consumption by households, investment by firms, government spending and consumption by foreigners on exports. Consumption by UK households of foreign imports must be subtracted because it is included in the measure called 'consumption by households'. An aggregate demand curve shows the total demand in the whole economy at any given price level.

Black Wednesday

This is the name that has been given to the 16th September 1992 when the pound fell out of the European Monetary System (ERM). It was know as 'black' at the time because of the complete collapse of the government's macroeconomic policy, which was based around the ERM. The government had also lost billions of pounds trying to stop the pound falling out of the system. Some economists have subsequently renamed the day 'White Wednesday' due to the fact that the resulting devaluation of the pound triggered the recovery in the economy from which we are still benefiting today.

Claimant count

This is the official measure of unemployment in the UK. Those counted must be out of work, physically able to work and looking for it, and actually claiming benefit. It is not felt to be as accurate as the ILO measure, because it does not include many who are not working, but are not technically claiming unemployment benefit.

Classical economist

Classical economists are, more or less, all economists before Keynes. They believed that all markets work according to the rules of supply and demand. They believed in supply side polices to improve the productive potential of the economy. They did not approve of government intervention in terms of demand management. This would distort the free workings of the far more efficient markets. The term 'neo-classical economists' is used for modern economists who believe in, and revived, the theories used by the old classical economists.

Cyclical unemployment

Cyclical unemployment is the unemployment caused by recession, or a deficiency of demand in the economy. It is involuntary unemployment. Whilst there will always be some 'naturally' unemployed workers (who are voluntarily unemployed), those who lose their jobs due to a downturn in the economic cycle will not be happy about their loss of a job.

Deindustrialisation

This is where economic activity moves away from manufacturing and into the service sector. It is the opposite of industrialisation. This process has been going on in the UK for a number of years now.

Demand-deficient unemployment

This is another term used to describe cyclical unemployment. The downturn of the economic cycle causes involuntary cyclical unemployment, but another way of explaining this process is the fact that there is a lack (or deficiency) of demand in the economy that leads to a recession and unemployment.

Economic cycle

Economies tend to have periods of strong growth (or booms) and then periods of slow or negative growth (slumps, or recessions). This process where the economy does well and then badly and then well again is known as the economic cycle. Governments would love to be able to eliminate this cycle and just grow at a steady, sustainable (i.e. without inflation) rate all the time. The current Labour government seems to have got close to doing this, but economists are dubious as to whether the cycle has gone for good.

Economically active member of the population

If an individual is economically active then he is either in employment or he is willing and able to work and actively seeking work.

Economically inactive members of the population

Not all members of the population of working age decide to participate in the labour market, which would, therefore, make them economically active. Examples include students, housewives (or househusbands) and those who retire early. These people are economically inactive.

Exchange Rate Mechanism (ERM)

This is the fixed (but adjustable) exchange rate system for EU currencies. In began in 1979 (without the UK). Currencies were fixed to a central rate (a weighted average of all the currencies), but countries were allowed to vary their exchange rate within a two and a quarter percent band. Realignments were allowed in exceptional circumstances. The UK joined in 1990 at too high a rate. The £ was allowed a 6% band, but it didn't help much. The £ was at the bottom of this band for most of 1992, and was forced out in September. Those currencies that survived the turmoils of 1992 and 1993 stayed in the ERM until their currencies were subsumed into the EURO in January 2000.

External costs

This is the cost of an externality. If a factory, when making cars, pollutes a nearby river, then the external cost is the cost borne by the third party who has to clear up the mess.

Fiscal policy

Fiscal policy is any government policy associated with taxation or government spending.

Frictional unemployment

These are people who are voluntarily unemployed as they search for a better job. They could take the first job that they find, but most would rather take a bit of time and find the best job available.

Full employment

This does not technically mean that everyone in the country has a job. There will always be some people out of work, either voluntarily (frictionally or structurally) or involuntarily (cyclical unemployment). In the UK at the moment, the official claimant count of unemployment is about one million. This is considered to be fairly close to full employment because most of them are voluntarily unemployed.

Geographical mobility

This refers to the ability of a worker to be mobile geographically. For example, how easy is it for a builder living in Liverpool to take a job in London as a builder and move himself and his family down there? British workers tend not to be very geographically mobile.

International Labour Organisation measure of unemployment

This measure is felt to be more accurate than the claimant count because it is based on a survey and, on top of everyone in the official count, includes the young unemployed who are not always eligible to claim, married women who can't claim if their husband is earning enough, and those who claim sickness and invalidity benefits.

Involuntary unemployment

If you are happy in your job, but you suddenly lose it, perhaps because of reduced aggregate demand in the economy due to a recession, then you are deemed to be involuntarily unemployed.

Jobseekers Allowance

This is the new name for unemployment benefit. As the title suggests, recipients have to be actively seeking work. An unemployed person can only claim this benefit for six months. After this period of time it is expected that he will have found a job, or at least taken advantage of a government-training scheme.

Keynesian economist

A follower of the economics devised by John Maynard Keynes. Briefly, Keynesian economists believe that the market is not always the answer. They work in perfect conditions, but things are not always perfect. In particular, at the time of the depression in the 1930s, Keynes believed that markets were not working. He felt that there was insufficient demand in the economy and it was up to the government to increase demand through government spending and lowering taxes. Keynesians believe in demand management, whereas classical (and monetarist) economists do not believe in this sort of government intervention.

Long run Phillips curve

The original Phillips curve was downward sloping showing a negative relationship between the rate of change of money wages (and, therefore, inflation) and the unemployment rate. As this relationship broke down, it was shown that the original Phillips curve only 'worked' in the short run. In the long run the unemployment rate does not fall below the natural rate. Hence, the long run Phillips curve is vertical, because any attempt, in the long run, to cut the unemployment rate below the natural rate simply causes the inflation rate to rise.

Monetarist economist

Monetarist economists are, basically, neo-classical economists. The reason for the name 'monetarist' is their strong belief in the growth of an economy's money supply being the main determinant of the economy's price level (the Quantity Theory of Money). Of course, they believe in the power of the market and supply side policies as well, and they do not like government intervention unless it is absolutely necessary (as with the classical economists).

Monetary policy

This is government policy concerned with the money supply, the rate of interest and the exchange rate. At any one time, the government can only really try to control one of these three things. Whilst it is quite easy to set the base rate, some would argue that it is futile to try and control the money supply (see the early 80s) and attempts to control the exchange rate (e.g. within the ERM) can also lead to disaster. Monetary policy in the UK is now, sensibly, centred on the adjusting of the interest rate (the job of the MPC) with the goal of controlling the inflation rate.

Money illusion

This is a concept used to explain why the Phillips curve can only 'work' in the short run. The increase in money wages that firms use to attract new labour is perceived to be a real increase in the wage rate by the workers. Actually, the increase in the money wage causes the inflation rate to rise, so the rise in the money wage is not a real increase in the wage rate. The workers are being fooled! Once they suss out this 'illusion' they act accordingly and give up the job; they would rather be voluntarily unemployed at this lower real wage rate.

National Minimum Wage (NMW)

The NMW was introduced in April 1999. It was set at £3.60 an hour for workers aged 22 and over, and £3.00 for 18-21 year olds. All employers are obliged, by law, to pay these hourly rates to their employees. It is designed to help those who were previously on very low wages to lift themselves out of poverty. Critics argue that it creates unemployment. See the topic called 'Labour markets' for much more detail.

Natural rate of unemployment

This is the long run rate of unemployment that is 'natural'. In the long run, assuming the economy is at the full employment level of national income, the economy will be at full employment in the sense that everyone who wants a job will have one. Only those who are voluntarily unemployed, either frictionally or structurally, will be unemployed. The unemployment rate will never be zero, therefore. There will be a certain amount of people who will be 'naturally' unemployed. This term is often referred to as the Non-accelerating inflation rate of unemployment (NAIRU) as well.

New Deal

This has been one of the major policies of the Labour government. Put simply, it guarantees either training or a job for all young people. It has been so successful that the government is planning to extend the scheme to all those who are long-term unemployed, regardless of age.

Non-accelerating inflation rate of unemployment (NAIRU)

Also referred to as the natural rate of unemployment. With reference to the Expectations-augmented Phillips curve, this is the level of unemployment below which the inflation rate will accelerate. If unemployment stays at or above the NAIRU, then the inflation rate will not accelerate.

Occupational mobility

This refers to the ability of workers to be mobile in terms of changing jobs. Occupational mobility will improve if a government invests money into retraining, especially for those workers who lost their job in one of the declining industries (whose skills are now redundant).

Petro-currency

The currency of the UK was considered to be a petro-currency in the early 80s. The output of oil from the North Sea was peaking. The resulting net exports of oil meant that the demand for the pound was relatively high, ceteris paribus, and some the value of the pound was higher than it would otherwise have been.

Phillips curve

Phillips was an economist who spotted a relationship between the rate of change of money wages and unemployment. He used data from past years to show that this relationship was negative. Since this find (in 1958), economists have used it to state that the relationship between inflation (closely related to the rate of change of money wages) and unemployment is negative. Until the relationship broke down (although not entirely) in the late 60s, governments used this relationship to gauge what the cost in terms of inflation would be for a given cut in unemployment, and vice versa.

Population of working age

This includes all men aged 16 - 65 and all women aged 16 - 60. Quite simply, it is all the members of the population who are of working age!

Production Possibly Frontier (PPF)

This is a curve that tends to be convex to the origin and shows all the possible combinations of two mutually exclusive groups of goods (military and non-military goods, for example) where all the economy's resources are being used and in the most efficient way possible. It is important that both of those conditions are fulfilled for an economy to be in a situation on rather than within its PPF.

Productivity

Productivity is the output per unit of input. Usually, labour is the input in question, so it is labour productivity that we are dealing with. This is output per unit of labour. Sometimes it is measured in terms of output per man-hour. Productivity can also be measured in terms of factor inputs or capital.

Rational expectations

Different economists argue about the length of the short run (in the context of the short run Phillips curve) because they argue about the length of time it takes for workers to adapt their expectations of the future rate of inflation. Those who believe in rational expectations think that workers adapt their expectations of the future inflation rate to changes in the actual inflation rate almost immediately due to perfect information in the economy.

Redundancy payments

In many industries, if a worker is laid off, or made redundant, then he is compensated with a lump sum payment. The size of the payment depends of the length of time in the job.

Replacement ratio

This concept is linked to the unemployment trap. The replacement ratio measures the proportion of a person's take home pay (including benefits) that will be 'replaced' by just benefits if that person loses his job. Obviously, if this figure is close to 100% (which it has been in the past) there is little incentive to actually take the job in question.

Structural unemployment

This is unemployment caused by a change in the structure of an economy. For example, the decline in the manufacturing industry over the last thirty years has created many unemployed men coming up to retirement age who have only been trained in the skills required for the dead industry. They find it very hard to find another job. Often they will stay unemployed until they reach retirement age. They will be part of the huge group of 'long term' unemployed. Most of these 'long term' unemployed are structurally unemployed.

Supply side policies

These are government policies that improve the supply side of the economy. This means that the productive potential of the economy improves. The economy can make more at any given price level. Another way of looking at it is that the production possibility frontier shifts outwards (away from the origin). Examples include privatisation in the goods market (which increases competition, efficiency and, therefore, productivity) and education in the labour market (again, this improves the productivity of the workforce).

Unemployment rate

This is the percentage of those in the working population who are officially unemployed. There are two measurements of unemployment. The claimant count based on the numbers that actually claim Jobseekers Allowance, and the ILO measure, that is thought to be more realistic because it is based on a survey and includes many people who are technically unemployed, but are not eligible for Jobseekers Allowance.

Unemployment trap

This is similar to the poverty trap but it involves the lack of incentives in terms of increased take home pay from taking a job when currently unemployed, rather than getting a better paid job, or a pay rise in a current job.

Value Added Tax (VAT)

This is the major indirect tax in the UK. It is imposed on goods and services, and is only paid by an individual if the good or service in question is purchased. Its current rate is 17.5%. Some goods are 'zero-rated', the tax is levied at 0% (i.e. there is no VAT on these goods). These goods tend to be essentials, or necessities. Many basic foodstuffs are zero-rated. The idea is that poorer people, who spend more of their incomes on necessities, will end up paying less VAT.

Voluntary unemployment

You might think that no one would be unemployed voluntarily. Economists refer to those who are frictionally or structurally unemployed as voluntarily unemployed. Those who are frictionally unemployed are looking for better work voluntarily, and those who are structurally unemployed are, rather harshly, deemed to be voluntarily unemployed because there is a job out there for them, they just need to be more occupationally or geographically mobile.

Workforce

This is the same as working population. It includes all members of the population of working age (16 - 65 year old men and 16 - 60 year old women) who are either in employment, or unemployed but willing and able to work, and actively seeking work.

Working population

Also called the labour force or workforce. This includes all members of the population of working age (16 - 65 year old men and 16 - 60 year old women) who are either in employment, or unemployed but willing and able to work, and actively seeking work.